But because the profit bump was achieved through price hikes and the elimination of promotional pricing, "it's not sustainable," Davidowitz said.

Investors cheered the company's upside earnings, however, and in Nasdaq trading Wednesday Sears' shares climbed $15.02, or 13 percent, to close at $132.29.

"This is not about sales growth," Richard Hastings, an analyst with New York-based Bernard Sands LLC, said in a positive report on the results. "It is about return on investment growth."

Quarterly results from the retail chain have been complicated ever since Sears Holdings was forged almost a year ago through the combination of mass-marketers Sears, Roebuck and Co. and Kmart Holding Corp.

As a formality, Sears Holdings compares results of the combined company in the latest quarter with Kmart Holding's results in the year-ago quarter, because the companies didn't merge until March 2005.

Investors prefer to focus on Sears' "pro forma" results, which treats the year-ago period as if the merger had already occurred.

Despite that slip in sales, however, Sears' net income climbed 10 percent, to $648 million, or $4.03 a diluted share, from the year-ago pro-forma net of $589 million, or $3.62 a share.

The company "ended the year on a slightly better note than we expected," said Morningstar analyst Kimberly Picciola. "Management's cost-cutting efforts paid off with improved profitability."

But, she continued, Sears Holdings "will have to make some major improvements in its merchandise offering and invest in its stores if it wants to effectively compete as the nation's third-largest retailer."

Sears is in a grueling market fight with giant rivals such as Wal-Mart and Target, and the issue of whether it should be plowing more money into sprucing up its operations remains a contentious one among analysts. Big expenditures might help attract new customers and retain market share, but such outlays would also pinch bottom-line profits.

At Sears outlets, same-store sales dropped a dismal 12 percent. At Kmart outlets, the measure rose 0.9 percent, the first gain since mid-2001.

In an upbeat "message from the chairman," Edward Lampert downplayed the importance of the same-store measure, saying it is a valuable metric "but one that is vastly overrated." Kmart started its rebound under his management a few years ago, he said, by "changing the objective from maintaining sales to growing profit."

He also defended the focus on profits over sales that the fourth-quarter results revealed.

While "reducing sales is not a prescription for success on a base of healthy, profitable stores," he wrote, "it can be a prescription for success where profit was not the primary objective, and where sales came from `giving product away' rather than from providing value to the customer."

But analyst Davidowitz wasn't buying that argument. "In the history of retailing, no company ever survived with this strategy," he said.